Oil pool account makes a comeback

OMCs leave a balance of Rs 2,856 cr so far this financial year in kitty

As part of a strategic move to make good the fiscal gains arising out of a global crude oil price slump, the Modi government has entered into an arrangement with oil marketing companies (OMCs) under which they will get full LPG (liquefied petroleum gas) subsidy but a fraction of it will be set aside for compensation for subsidised sales or under-recoveries. The rest will go into a pool account.

The government’s unique strategy of creating a financial cushion is a revival of the Oil Pool Account (OPA), which in the 1980s evened out fluctuations in product prices. When price control imposed losses on OMCs, they received compensating cash from the OPA. If, however, the global prices fell below the controlled domestic price, the surplus went into the coffers of OPA.

When oil prices slumped to $16 per barrel in 1986, the government did not slash the price of petroleum products, allowing generation of a big surplus in the OPA. This cushioned the government’s finances and provided a reserve for darker days ahead — oil prices shot up again in 1991.

With a similar strategy in the pipeline now, the balance in the LPG pool account has swelled to Rs 2,846 crore and OMCs plan to tap into these funds when under-recoveries start rising due to a possible crude oil price spike. At the current rate of collection in the pool account, its size would represent more than a fourth of the budgeted LPG subsidy of Rs 20,000 crore for the current financial year.

The pool account strategy could explain the government’s comfort on fiscal deficit front despite the expected shortfall in disinvestment proceeds. Finance Minister Arun Jaitley had last month said lower receipts will not upset the fiscal math and there will be no difficulty in meeting the fiscal deficit target of 3.9 per cent for the current financial year.

The finance ministry has capped LPG subsidy at Rs 18 per kg (Rs 255 per 14.2 kg cylinder). This means the government is compensating OMCs for subsidised LPG sales only to the extent of Rs 18 per kilogram. Losses above this level are to be borne by upstream firms. However, with the slump in crude prices, OMCs’ under-recoveries have hovered between Rs 9 per kg and Rs 14 per kg between April and September 2015.

“The government transfers funds to us in an escrow account at the rate of Rs 18 per kilo. We withdraw our compensation from this amount and the balance is left to be collected in the bank account,” said a senior IOC official, adding the firm has so far collected Rs 1,700 crore in its pool account maintained for collection of LPG subsidy savings. The two other OMCs — BPCL and HPCL — have contributed the rest Rs 1,100 crore of savings.

A bulk of the savings has been accrued in the pool account in the month of September alone when the OMCs’ LPG under-recoveries stood at Rs 9.97 per kg. This amount was withdrawn by the oil firms, leaving the balance Rs 8.1 per kg in the escrow account. At a level of subsidised LPG consumption of 1.28 million tonnes in September, the total collection in the pool account for that month stood at Rs 1,036 crore.

Querying the periodicity of subsidy transfer by the government, an IOC executive said the government had transferred the subsidy amount for the April-August period in the pool account in a single lot. This works out to Rs 10,854 crore, based on estimated consumption of 6.03 million tonne and subsidy of Rs 18 per kg.

Consumers are currently entitled to twelve 14.2-kg cylinders or 34 five-kg bottles in a year at subsidised rates. Any requirement above that has to be procured at the market price. A subsidised 14.2-kg cylinder is currently available at Rs 417 per bottle in Delhi against the market price of Rs 545 per cylinder.

OMCs suffered total under-recoveries of Rs 72,000 crore on sales of subsidised petroleum products last financial year. This included Rs 36,000 crore losses on LPG sales alone. In the first quarter ended June in the current financial year, LPG under-recoveries accounted for Rs 4,857 crore of the total losses of Rs 8,745 crore for OMCs.